The rocketing Rolls-Royce (LSE: RR) share price has created a painful problem for many investors. When a FTSE 100 stock flies it’s wonderful for those who hold it but frustrating for those who don’t. And this one really hurts. Rolls-Royce shares are up more than 1,000% in five years.
The temptation is obvious: jump on board. The worry is that investors do so as the rally runs out of fuel. That’s the nightmare scenario. Not only have they missed the spectacular gains, they could end up in the red. So what to do?
Timing stocks like this one is almost impossible. I’ve struggled myself. I spotted the moment of maximum opportunity and bought its shares in September 2022, then banked my profit too early when I needed some cash. Later, I took advantage of another dip and invested again. I got lucky. I’m sitting on a 200% gain.
FTSE 100 rocket
Overall, I’m happy. But I’d be happier if I’d simply stuck to The Motley Fool‘s classic strategy of buying great companies for the long term and holding them through thick and thin, unless the underlying investment case changes.
Lesson learned. I’m holding now. Investors who haven’t taken a position, and had perhaps given up on Rolls-Royce, may be having a rethink after the shares dipped just over 5% last week, triggered by events in Iran. The FTSE 100 fell 5.74% over the same period, so Rolls-Royce has broadly moved with the market.
However, one key number has changed. Recently, whenever I’ve written about Rolls-Royce, I’ve warned readers about its sky-high valuation. Last month, the price-to-earnings (P/E) ratio hit a dizzying 65. Investors were clearly pricing in huge future growth.
Defence versus civil aerospace
So far, CEO Tufan Erginbilgic has done a magnificent job of justifying that optimism. Last July, he upgraded the group’s 2025 targets to underlying operating profit of £3.1bn–£3.2bn. That seemed ambitious at the time. But when full-year results landed on 26 February, Rolls smashed it. Full-year profit jumped 28.8% to £3.46bn.
Erginbilgic is setting the bar even higher for 2026 and beyond. It’s been hard to bet against him. But if Rolls does fall short, many investors will be off. They won’t even say thank you for all the growth.
The recent dip has at least eased the valuation, with the P/E falling to around 43. That’s still expensive, but it’s less extreme than before.
Rolls-Royce’s defence arm could benefit from the current geopolitical turmoil, sadly for the world. However, the bulk of its profits still come from civil aviation engines and the accompanying long-term maintenance contracts, which are linked to flight hours. If Middle Eastern airspace is closed for some time, that could dent revenues. The recent 5% pullback offers a slightly cheaper entry point, but there are new risks too
For long-term investors, Rolls-Royce still looks worth considering. But with markets so volatile, it may pay to watch events closely. There’s a chance the shares could become even cheaper in the weeks ahead. This is a tricky game to play and nobody can expect to catch the very bottom of the market. But I’ll be watching Rolls-Royce like a hawk in the uncertain weeks ahead. And there are plenty of other FTSE 100 stocks I’m keeping close tabs on too.
